<font color=blue>2001 MAR 15 Market Commentary
The market is always diabolical. Over this past week, we have been watching the 30-year Treasury bond futures consolidate within a triangle, with an eye to a move to the upside in order to test the contract highs.
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This basically means that interest rates are moving down for the moment. Today, the price finally broke out of the triangle to the upside, positioning the T-Bond for a test of contract highs. We note that on this important test of top, there appears to be a rising wedge, which has bearish implications.
ottographs.com
We discussed this morning in TopTick SquawkBox that we are witnessing another predictable reflex “flight to quality” episode, but are they nuts? And sure as clockwork, the media begins to beat the drum:
thestreet.com
These are interesting times. Let’s think about this for a minute. We are going into an FOMC meeting on March 20, and the next one is not due until May. In Europe, from as far away as Turkey, currencies are beginning to destabilize. Japan is underwater, and now, the U.S. economy is acting as if its been thrown into the river, wearing a pair of cement boots. It’s as if we’ve dozed off in front of the TV, fading away to the old classic, It’s a Mad, Mad, Mad, Mad World.
Just like the Long Term Capital Management crisis and the Asian Flu episodes before this, capital markets are turning to the U.S. Federal Reserve to make it all right. But this time, perhaps it’s bigger than all of us.
First of all, last spring, when the NASDAQ first cracked, we surmised that business on the Net would contract very quickly and spread into the economy. The main reason is that after a long boom, as we learned in our corporate finance days, those who take big risks and get rewarded usually take on even more risk as the market goes up. At the high, they are leveraged to the max. This is what happens to the (ad)venture capitalists every time.
In lean years, they are tightwads. They are judicious and prudent with other people’s money. These investments pay off when the market improves, and they take on more. When the market has been good for a long time, typically we find that the financiers have taken on ever bigger projects with more and more risk – and with their own money. When the music stops, they are holding the bag, with all their illiquid bets. This is probably exactly what happened in Silicon Valley. Amidst the greed and avarice, prudence fell by the way side, and the average firm was caught over-extended. Suddenly there was no more money. This is why the speed of the contraction in the Net sector happened so fast. In the old days, the little guy would get the pink slip, but this time around, given the amount of the hemorrhage, the kind of expensive equipment and high-priced knowledge workers required to run these companies, people at the top of the food chain got it first. They got “whacked”, and everyone else was cut off at the knees.
How did we know? Well, we used to hang around those who financed moose pasture in Canada. We’ve heard a lot of tall tales laden with B.S. (remember Bre-X?), and businesses whose core revenue model was “free” never did sit well. When the Net stocks were going parabolic, we thought it was insane but you can’t argue with a good corporate structure of IPOs with no public float, can you?
Back to the problem with bonds. This time, obviously there is a global crisis lurking just beneath the radar of the media. What is the FOMC to do? There is a crisis in the market in the U.S. Capital has stopped flowing. Arguably the crisis in confidence in the public is even more worrisome. Company after company is telling analysts that they have “no visibility” as to what is happening with sales and so forth, looking out over a period of weeks. It’s that stark out there. A big cut in rates is expected. That’s great, and it boosts bond prices, right? Well…maybe. If only it were so easy.
Clearly, the FOMC is walking a fine line. One of the good things about Chairman Greenspan’s age is that he can remember the aftermath of the Great Depression. As he has said before, he has watched the U.S. economy on a daily basis for 50 years. He knows the gravity of the situation, and perhaps this deterioration is unprecedented. Certainly nothing like this has happened since the early 1970s, after the top of the last secular bull market in the late 1960s. He is stuck between a rock and a hard place. He can’t make the entire U.S population pay for its “irrational exuberance”, and perhaps Mother Market has already spanked the participants to the point of breakdown anyway.
How can Greenie and Company give us comfort, and make it all right? The only way is to start printing money. This obviously has negative implications and the long-term smart money that has to be with bonds knows that this is likely the only scenario possible. With huge unfunded medical and pension fund liabilities coming due over the next ten years, as the first of the Boomers retire, things are really only going to get worse. The smart money will know that inflation and money printing is around the corner. With the recent news from Japan, we know that austerity is not the way to go.
So…here we are, on a test of top. I expect the bonds to fail here, shortly before the meeting. If somehow it does not, it would mean far worse things ahead. If the smart money does not believe there will be money printing and sends interest rates even lower, things will be much worse than it seems even now.
Teresa |
